Earnings season "pleasant surprise" for stock market

EPAStocks pared the gains they made earlier in the day over concerns about the rising value of the dollar.

U.S. stocks rose for a third day as higher-than-estimated profit forecasts and Microsoft Corp.’s purchase of Skype Technologies SA bolstered optimism that earnings and takeovers will keep fueling the rally.

Dean Foods, the largest U.S. milk processor, jumped 11 percent after its earnings forecast beat analysts’ estimates. Microsoft fell 0.6 percent after agreeing to buy Skype for $8.5 billion to expand its Internet presence after past failures. Titanium Metals gained 2 percent, pacing gains in raw- material producers, as metal prices advanced before the release of figures that may show weaker inflation in China.

The S&P 500 gained 0.8 percent to 1,357.16 at 4 p.m. in New York. The benchmark gauge has risen 1.7 percent over the past three days. The Dow Jones Industrial Average advanced 75.68 points, or 0.6 percent, to 12,760.36 today.

“The earnings season has been a pleasant surprise,” said Mark Luschini, chief investment strategist at Philadelphia-based Janney Montgomery Scott LLC, which manages $53 billion. “There wasn’t a great deal of optimism that earnings were going to beat estimates with the vigor that we’ve seen. On top of that, we’re getting big M&A deals. That’s an indication that companies have a lot of cash and will continue to do deals.”

The S&P 500 fell 1.7 percent last week following a rout in raw materials that knocked off $99 billion of market value from commodities. The S&P 500 has advanced 7.9 percent this year amid government stimulus measures and higher-than-projected corporate profits. Earnings-per-share have beaten analyst estimates at 72 percent of the 423 companies in the S&P 500 that reported results since April 11, Bloomberg data show.

Import Prices
Prices of goods imported into the U.S. rose more than forecast in April, driven by gains in fuel and food that may put pressure on some companies to raise prices.

Financial, technology and health-care stocks offer “value,” Bill Miller, the chairman and chief investment officer of Legg Mason Capital Management Inc., wrote in the Financial Times today. He said valuations in those industries have been more expensive 90 percent of the time during about the past 60 years.

Higher Commodity Prices
Miller, whose Legg Mason Capital Management Value Trust fund outperformed the S&P 500 annually for 15 straight years through 2005, said a lower U.S. dollar and higher commodity prices will be “bearish not bullish” for stocks as the Federal Reserve is set to end its asset-purchase program next month. The fund was outperformed by 98 percent of peers in 2010, according to data compiled by Bloomberg.

“We believe now is a good time to buy what’s on sale, and a bad time to buy what’s marked up,” Miller said.

S&P 500 financial companies are currently trading at 13.7 times reported operating earnings, while technology stocks are trading at 15.8 times and health-care shares are selling at a multiple of 13.4.

Dean Foods jumped 11 percent to $12.24. The company forecast full-year profit excluding some items of at least 67 cents a share. On average, the analysts surveyed by Bloomberg estimated earnings of 57 cents.

Microsoft’s Deal
Microsoft lost 0.6 percent to $25.67. Microsoft will acquire Luxembourg-based Skype, with 170 million active users, from an investor group led by Silver Lake, the companies said in a statement today. The agreement was approved by the boards of directors of both companies.

The takeover may help Microsoft Chief Executive Officer Steve Ballmer attract Web users and narrow Google Inc.’s lead in Web advertising. Microsoft will connect Skype to its Outlook e- mail, Xbox game console, Windows mobile phones and corporate- phone software. The acquisition is Redmond, Washington-based Microsoft’s largest, surpassing the purchase of AQuantive Inc. for about $6 billion in 2007.

Overall, there have been 8,768 deals announced globally this year, totaling $883.8 billion, a 26 percent increase from the $699.13 billion in the same period in 2010, according to data compiled by Bloomberg.

A gauge of raw-material producers in the S&P 500 rose 0.7 percent as metal prices rallied. Titanium Metals, a Dallas-based producer of the metal, added 2 percent to $19.89.

China Prices
Chinese consumer prices climbed 5.2 percent in April, slowing from 5.4 percent in March, according to a Bloomberg News survey of economists. Concern that Chinese demand may slow as authorities move to tighten credit contributed to copper’s 7.1 percent drop in March and April in New York.

The biggest weekly retreat in U.S. equities since March did “little damage” to the S&P 500 and the pullback presents a buying opportunity, according to MKM Partners.

The benchmark for U.S. stocks maintained its “positive momentum” despite falling four of the five days last week, said Katie Stockton, MKM’s chief market technician. The index’s Moving Average Convergence/Divergence line, calculated by subtracting the index’s average level during the past 26 days from the average over the past 12 days, stayed above its uptrend line since March, a sign that the market may resume its rally and extend its gain to as high as 1,420, she said.

“The pullback did surprisingly little damage from a technical standpoint,” Stockton wrote in a note dated May 8. It’s “a testament to the strength of the uptrend.”